The beginning of 2016 coincided and marked the top in USD/ZAR exchange rate that saw the South Africa Rand strengthening through the entire course of the year reaching levels not seen since the summer of 2015. There are several macro catalysts from the Fed’s unwillingness to hike rates, China, commodity prices and South Africa domestic affairs that have inspired the shift in the well-defined USD/ZAR bullish trend started in the summer of 2011.
Negative Interest Rates Policy versus South Africa Monetary Policy Tightening
There is a disparity and a significant contrast between the developed economies and emerging markets, such as South Africa. On the one hand, the developed world is pursuing strong easing monetary policies with many countries intensifying their easing efforts and going negative interest rates (NIRP) while South Africa has stepped up their tightening efforts with two rates hikes since the beginning of the year pushing the benchmark interest rates from 6.2%, up to 7%.
South Africa is financially unstable because of the relationships to these major central banks that are collectively lowering their policy, encouraging risk-taking and seeing capital flows exaggerated into and out of the emerging countries.
Because the opportunity to make a return in an NRIP environment is so low, investors have been motivated to take on risk and favor the higher return offered by emerging markets, including South Africa. However, we saw that with the increase in volatility and risk becomes more apparent then we saw an exaggerated money outflow from South Africa
Commodity Price Rally
It comes as no surprise that commodity prices have dramatically surged, especially the metals if you take into consideration the NIRP and the global uncertainty after the Brexit. Gold has started a cyclical recovery that in the end will prevent the Rand from weakening too much. Since South Africa is a major commodity exporting economy this makes the USD/ZAR exchange rate at risk to any variation in Gold prices. Since the beginning of the year, Gold prices rallied 24.37% making it among one of the best-performing assets in 2016 which in part explains why the Rand has been so strong so far in 2016.
South Africa Domestic Economy
South Africa reclaimed its status as the largest African economy toppling Nigeria, which held this position for more than two years. South Africa GDP growth was also influenced by the increase in the exchange rate value of the Rand. During this period the ZAR exchange rate gained +12.77%, making it the second best performing emerging market currency after Russian Ruble. The size of the South African GDP at the current exchange rate is $301 billion. However, in real terms, the GDP growth rate contracted in the first quarter of 2016 by 1.2% annualized rate.
Generally, foreign investors would like to see a more balanced political environment. The saga surrounding the South Africa’s Finance Ministers started with the Nenegate scandal and more recently with Pravin Gordhan, the new Finance Minister, has failed to induce any material effect on the currency exchange rate as, since the Nenegate scandal, the ZAR has been strengthening. Even the short-term Rand weakness was a response to the most recent comments from the Fed Chairwomen Janet Yellen which sparked speculation in regard to a possible second USA rate hike sooner rather than later.
The interest rate differential is heavily in favor of the Rand so without any major political moves, the exchange rate will continue to do well as the political landscape hasn’t had any major material impact on the USD/ZAR exchange rate.